Deciding To Buy or Rent After Divorce

Deciding To Buy or Rent After Divorce

If you are newly divorced or about to be, and faced with moving you of the marital home, you’re probably weighing deciding to buy or rent after divorce. It’s a major consideration with the potential for significant emotional and financial implications either way. Check out the list of questions to ask, factors to consider, and a nifty tool to weigh the costs before making your decision to buy or rent.

In 2011, I found myself in the buy or rent dilemma. Because I could not afford our 3,000 square foot marital home on my income, I was the one to move. At the time my ego won out over everything else, and I ultimately purchased a home in another town.

While I didn’t immediately regret my decision, I soon realized the shortsightedness of it. In these past seven years, I’ve moved two additional times and learned much more about real estate, personal finance, and myself. I hope to help you learn from my experience.

Deciding To Buy or Rent After Divorce – Each Hold Pros and Cons

Buying a home has typically been a plus factor in evaluations of financial success while leasing has often been perceived as “throwing your money away.” However, with the housing crisis not yet a forgotten memory, and younger generations on the move, opinions are changing. Now, thoughts of a dream home are not so dreamy, and the benefits of renting are proving popular.

The typical pros for buying sound like this:

  • A home is yours, and you can paint, remodel, and decorate any way you want
  • Once your mortgage is paid off, you own it completely, with only maintenance, property taxes, and insurance costs remaining
  • Homes generally appreciate in value
  • Improvements to the home may allow you to ‘earn’ money when you sell
  • Tax credits may help to reduce some of the ownership costs

On the flip side, here are common renting pros (or buying cons):

  • Renting is not throwing your money away, it’s simply securing a temporary place to live
  • With renting you aren’t on the hook for emergency repairs or maintenance costs for the property
  • Costs for insurance, and often utilities too, are lower
  • There’s no personal financial concern if the property increases or decreases in value
  • Purchasing a home ties up a large sum of money while also tying you down more permanently
  • Owning property comes with the additional monthly costs of taxes and mortgage interest

All these factors do not weight equally, however. To effectively compare renting to buying after divorce you need to know the whole story.

Start With These 6 Questions When Deciding To Buy or Rent After Divorce

  1. What do you need? First list out what you need in a home before you start on your list of wants. Consider who will be spending overnights in the house and what space is required. Sure you may want room for a home office, gym, play area, and your car restoration project, but is it a bona fide need? It is entirely possible to meet all your needs with a rental property, and maybe even a few of your wants. Attempting to purchase them all, however, may cause you to overextend yourself financially.
  1. How long are you planning to stay in your next home? Buying and selling a home involves costs, far beyond the purchase price. Realtor and attorney fees, inspection fees, appraisal fees, mortgage origination fees, and title insurance costs are among those to consider.These additional costs may make owning a home far less practical unless you remain in the property more than a couple of years. Selling within the first few years, might not give the home time to appreciate enough to balance out the additional costs.
  1. What’s the likelihood of house prices rising? In recent years the housing market showed us it falls and stagnates as well as it grows. How would your overall financial life look if your house’s value increases slower than the market, does not increase at all, or decreased suddenly? Your home may not be an investment at all, only an expense.
  2. Will you be eligible to save on taxes by buying? While it’s true some buyers can balance additional costs of homeownership with tax savings via the mortgage interest deduction, not all do.You must be able to itemize tax deductions to receive the benefit. With your new marital status, your tax-filing situation will be different, and your deductions may change. Speak with a tax expert to understand your potential tax savings if any.
  3. Are you financially stable right now? Divorce usually impacts your financial life dramatically. If you currently hold any debt, face alimony or child support payments, and are behind on your retirement savings, now may not be the best time to make a significant purchase.
  4. Are you emotionally stable right now? This may indeed be the hardest question to answer while also being the most important. Divorce is stressful. In fact, it is number two on this list of the 10 most stressful events of life. While you may know that logically, you may not fully understand yet how it’s affecting you.

Rushing into a decision to purchase a home may only lead to more stress down the road. Speak with a close friend, family member, or a professional if you need help sorting through your emotions.

To Buy or Rent, the Financial Comparison

Accurately comparing the financial difference of renting or buying requires you to factor in the entire cost of home ownership —not merely the monthly mortgage payment versus rent payment Additionally, you want to look at the overall money picture.

For example, consider if finances not tied up in a home could earn you more through investing in a diversified index portfolio, thereby improving your overall net worth and financial security.

“Rather than simply focusing on monthly or annual costs of the buy versus rent decision, consider which option would have a greater positive impact on your overall wealth at the end of your stay. For example, let’s say your total costs of ownership were $2,000 a month and you could rent a similar property for $1,800 a month. You might consider how that additional $200 a month could grow if you were to invest it in a diversified portfolio and compare it with all the home equity you will build up during the same time through your mortgage payments.” – Fidelity Investments

You can run a simple rent vs. buy comparison by looking at the price-to-rent ratio. Taking the home value and dividing it by the annual rent amount calculates this. In general, when the price-to-rent ratio is higher than 20, renting looks to be the better option. If the ration is less than 20, buying may be the better way to go. Any comparison, however, is only beneficial when you are comparing similar properties.

A sophisticated, yet easy to use online tool that requires a few additional inputs does the calculations for you – found here.

It’s Not Just About the Money

When weighing the differences between the homes you’re considering, take into account the non-monetary benefits of each as well. Does one offer the outdoor space or ideal location you desire? Will one keep you closer to your children or ease your daily commute?

I failed to do any of the above when deciding to buy or rent after divorce and jumped into buying a home quickly. Fortunately, it ended up being a positive financial move even though I sold it two years later, but it was the wrong move on an emotional level. Just a few months in I realized I should have listened to my brother and best friend and leased a property first.

When you are coming out of a divorce, you’ve no idea what your life will be like even one year later. Give yourself some time to get accustomed to your new life. And your kids will do just fine in an apartment or rented home.

The Bottom Line

Renting or buying can each work in your favor. Yes, owning a home may be beneficial over an extended period but renting may be the best option today.Ask and answer the hard questions and crunch the numbers. Then make the best financial and emotional decision you can for you and your family, with all the information in hand.

Additional Resource:

 

Losing Your Child To Parental Kidnapping

Losing Your Child To Parental Kidnapping

Most people believe strangers are responsible for the majority of childhood abductions, but national statistics say parental kidnapping is more often to blame. A family abduction occurs when a family member, likely a separated or divorced parent, takes and hides a child for some length of time. This heartbreaking and devastating crime occurs more than 200,000 times each year.

Childhood kidnapping is usually driven out of anger, frustration, abandonment and desperation. Often, emotions overwhelm personal judgment and sound reasoning. And in custody disputes, this often leads to one parent losing their child to parental kidnapping.

Often cited reasons for parental abduction include:

  • Forced interaction or a reconciliation with the parent left-behind
  • Spite or punishment against the other parent
  • Fear of losing custody or visitation rights with the child
  • Protecting the child from the other parent who is perceived to molest, abuse, or neglect the child

Are You at Risk of Losing Your Child to Parental Kidnapping?

There are often subtle and obvious warning signs of a pending abduction. The most common signals your child may be in danger of parental kidnapping include:

  1. Threatened abduction or attempted abduction in the past
  2. Suspected abuse supported by family and friends
  3. Paranoid delusion or severely sociopathic behavior
  4. Your spouse/ex has alien citizenship (in a foreign country) and may potentially flee the US
  5. Your spouse/ex feels alienated from or fears the legal system, and has family or social support in another community or abroad
  6. Your spouse/ex has no strong ties to your child’s home state
  7. Your spouse/ex has no job or is not financially tied to the area
  8. Your spouse/ex is planning to quit a job, sell a home, or close bank accounts
  9.  Your spouse/ex applies for passports, or obtains copies of school or medical records

Pay close attention to these any and all of these potential signs and contact the family court and/or your attorney for assistance. Any direct threat of parental kidnapping must be taken seriously. The family court and law enforcement authorities should be contacted immediately if you feel your child is in grave danger.

Parental Kidnapping is a Serious Crime

Both parents are entitled to equal rights and access to a child unless an order specifically limits one parent’s rights or access to their child. Before a divorce or child custody suit is filed, either parent can take their child and maintain custody of them.

Once a custody order is in place, each parent must abide by it. If a parent without legal custody of their child violates a custody order and snatches or conceals a child, they may be potentially charged with parental kidnapping.

The taking of a child is considered kidnapping by looking at three main factors:

  • The legal status of the offending parent
  • Any existing court orders regarding custody
  • The intent of the abducting parent

Parental abduction often violates many federal and state laws, and if parental abduction occurs, contact law enforcement immediately. As enraged as you may be, don’t take the law into your own hands. Let experienced officers use the justice system to help you locate and bring home your child. You should also contact your family law attorney, and if the where abouts of your child are unknown, consider hiring a private investigator to locate your child and to focus dedicated resources on the case.

State Kidnapping Laws

Laws vary by state, but generally parental kidnapping involves a suspect abducting a child and holding them in a location they won’t likely be found. Some states laws maintain a parent cannot keep a child more than 24 hours with the intent to conceal them. In some states, just the unlawful retention of a child is sufficient for a charge of parental kidnapping; the use of force or a weapon is not required in all states to support the criminal charge of parental kidnapping. However, many state also include a defense for any parent attempting to protect their child from real threats.

Preventing Family Abductions

Custody battles are frustrating and can be infuriating, and child abductions are not uncommon. To keep your children safe, consider following these recommendations:

  • Start any child custody process immediately upon learning of your impending separation/divorce (as you need a custody order to prove your rights)
  • Impose visitation restrictions, such as supervised visits, if there is imminent danger of parental abduction
  • Include parental kidnapping prevention measures in the custody order such as having both parents post bonds. This will serve as a deterrent, and if the child is abducted by your spouse/ex, the money helps you with costs of recovery. For further information visit the Professional Bail Agents of the United States at www.pbus.com.
  • Maintain a certified copy of the custody order at your home.
  • Document any abduction threats and report them immediately to your family court and/or attorney.
  • Contact the police to intervene and alert your spouse/ex of the consequences of child abduction.
  • File certified copies of your child’s custody order with their schools, healthcare providers, daycare, sitters, etc. Make sure it’s known not to release your child to the non-custodial parent without your permission and demand to be notified if an attempt is made.
  • Keep a record of all physical descriptive information on your child and your spouse/ex, including height and weight, hair and eye color and any distinguishing marks, and maintain current photos (6 months). List social security numbers, license plate numbers, vehicle information, and other identifiable data.
  • Obtain a passport for your child, and let authorities know your child cannot leave the country without your written authorization – see the U.S. Department of State for more information.

Although it may be difficult to do, maintaining a friendly connection to the your spouse’s/ex’s family may be beneficial. It could help you avoid the trauma of family abduction, and in the event of a kidnapping, you may need their support to bring your child home safely.

What Else You Can Do

Keeping your children safe also requires open communication between you and your child. Ensure your children know as much information as possible including their full name, your full name, and full addresses and phone numbers. Make sure they know how and when to call you, and how and when to contact 911 services.

Most of all, make sure your child feels loved. Convey a message – without mentioning, or accusing the your spouse/ex of being a potential threat, and that you will always love them, look out for them and will do anything and everything to be with them.

Losing your child to parent kidnapping is gut wrenching and heartbreaking not only for you but also for your child. Fortunately, laws exist to help you get your children back. Should you ever lose your child due to parental kidnapping, turn to the criminal justice system and law enforcement for help.

Should you have any questions specific to your child custody or visitation case, or if you would like help enforcing a child custody order, contact a divorce attorney or a Father’s Rights attorney in your area for help.

Resources:

Photo Credit: Canstockphoto.com 

Teaching Your Kids About Money

Teaching Your Kids About Money

If you’re a Dad who wants his kid to do well in life, then one of the best things you can do is to start teaching your kids about money. The sooner, the better. Children who learn smart earning, saving, and spending habits early on positively impact their financial futures.

Skills to earn income, save, invest, and spend money can be taught at a very young age. Understanding the difference between needs and wants, grasping the concept of how savings grow, and grasping how debt can negatively impact one’s life are all entirely possible for children to learn.

These concepts are not often taught in most schools, and while I think they should be, I think it is more important that dads take the lead in teaching your kids about handling finances. Because frankly, who cares more about your child’s money than you and them anyway?

Ways to Teach Financial Basics

Allowance

I did not give my children an allowance, but in hindsight, I wish I did. Having them ‘earn’ an income is a great way to teach the ins and outs of earning, saving, spending, and even donating. As children are faced with situations such as wanting a toy or piece of clothing that isn’t in the family budget, they can be taught the difference between needs and wants. You can be teaching your child patience as well by showing them how to save for a desired purchase that is not in the family budget.

Shopping

Grocery or back-to-school shopping trips can be great teaching opportunities. Start by preparing a list of needs before hitting the store. Show your child how to compare prices, take advantage of things that are on sale, or buy in bulk to save additional money.

Explain how the brands they may see advertised on television are not always the best value option. If they ask for items that are not on the list explain that those things are not necessary and be willing to say no. Alternatively, you can use those times for teaching your child they can pay for their wants out of their savings.

Banking

Open a savings account with your child and if they are of working age assist them in opening a checking account. Owning and maintaining savings accounts can children learn about interest, how to deposit and withdraw money, and depending on their age, properly use debit cards.

Business

Does your kid show an entrepreneurial spirit? Help them start a small business. A lemonade stand, lawn mowing, snow shoveling, or babysitting services are all reasonably easy options for teaching your kids about money. This is an excellent way for them to learn financial skills. Also, they can learn how to set and achieve goals, what profit and loss are, how pricing effects profits, and more importantly how hard and honest work can be rewarded. A small business can also instill confidence and necessary people skills.

Hacks for Teaching Your Kids About Money

  1. Use clear jars to accumulate money for saving, spending, and donating so that your child can visual see the money. As they earn money or are gifted money, teach them to split the money between the different jars, based on agreed upon designations. Such as 25% for long-term savings they can’t touch, 25% for short-term savings, 10% for donations, and 40% for spending on their wants.
  2. Have them count their money and record in a notebook or on the computer, each time they add money to their jars or take money out. Putting down notes as to where the money came from or how it was spent or donated is a good habit for them to create. You’ll be teaching your kids about money, and about record keeping.
  3. Assist your child in setting goals for their money. If they want a toy that will take four weeks of allowance to pay for or their first car, which may take them four years, help them create a savings chart to track it. This can be done with a simple piece of paper and crayons for young children or an Excel spreadsheet for an older child.
  4. Physically show them how money works. Instead of using your credit card online or at the store teach them how to use cash. Go through the motions with their own money when they want a toy by having them grab a few dollars out of spending jar and taking it to the store to physically purchase an item.
  5. Explain the concept of opportunity cost. If you buy this book with your money, you won’t be able to buy that toy too.
  6. Find opportunities for teaching your child the importance of giving and lead by example. Even with just a little bit of money, they can learn about giving. Have your child pick a charity, a cause, your church, or even someone they know who could use a little help. Eventually, they’ll understand giving doesn’t just positively affect the charitable causes they give to, but also the giver as well.
  7. Describe how compounding interest works – Interest is earned on the original amount of money saved, as well as on any interest already earned. Here’s a fun calculator for them to try.
  8. Educate them about credit and the danger of credit cards. Stress the importance of using credit responsibly and paying off credit cards in full each month. Credit card debt is costly and can quickly ruin one’s life. Don’t let them learn this the hard way.

Financial Technology and Money Apps for Teaching Your Kids

As your child ages, you’ll likely want to introduce them to more technology-based financial education. This may aid you in teaching them necessary to understand concepts mentioned above. Here are a few highly rated fin-tech products you may want to check out when you and your child are ready.

FamZoo

FamZoo, encompasses many areas of teaching kids about money, including spending, saving and giving. Their technology allows you to utilize prepaid cards or a simple IOU system instead, to provide allowances to your kids. It’s entirely customizable, goal-based, simple to use and in addition to allowance tracking, FamZoo also allows you to:

  • Assign payments for chores
  • Set up savings buckets to pay your kids a specified interest rate (compounding interest!)
  • Establish separate logins for your child to give them responsibility for tracking their money.

FamZoo offers lots of features for a variety of ages making it an awesome program that grows with your kids.

Bankaroo

Started in 2011, Bankaroo is the idea of an 11-year old daughter and her father who helped her bring it to life. It is a virtual bank designed for kids, ages 5 to 14. It teaches the value of money in a fun and straightforward way. Create checking, savings, and charity accounts for your kids to track their allowance, gift, or chore money. Kids can also create savings goals and earn cool badges.

Bankaroo has mobile apps in both English and Spanish and offers financial curriculum programs for schools too.

PiggyBot

Aimed at kids, ages 6 to 8, PiggyBot offers an easy way to track allowance spending and saving. Instead of cash, your kids have a virtual balance, like an IOU with you. Each child has a separate Spend-It, Share-It, and Save-It account and you decide how to allocate the allowance.

Kids can set goals, take pictures of things they want and share money. There’s also an option to show off the items they purchased. The system is designed to reinforce principles of saving for wants, needs, and nice-to-haves.

One of the most important things you can do as a parent is to communicate with your child early and often on how to earn, save, and spend. There are many ways, tools, and technology available for teaching your kids about money. Offer several examples to them of how money is earned and provide your child the opportunity to help decide how it is budgeted for saving, spending, and sharing. Also, please educate your children about the dangers of spending above their means, overusing credit cards, being in debt, and paying high-interest loan rates.

Additional Resource:

Money Confident Kids

When Spending On Children Gets Out of Control

When Spending On Children Gets Out of Control

Kids cost money, an undeniable fact. While it is impossible to know from the start just how much those little bundles of joy will cost you, experts predict a total cost of almost $250,000 on average. In the most recent estimates from the United States Department of Agriculture (USDA), the annual amount of spending on children ranged from $9,330 to $23,380. Costs varied, of course, depending on household income, the age of the child, and family composition.

The USDA’s Expenditures on Children by Families annual report aids family court systems and government agencies in determining child support expenses. It provides estimates for significant budget items in the cost of raising children from birth through age 17. The budgetary components include food, housing, transportation, healthcare, clothing, childcare, and education. The report also provides estimates for miscellaneous goods and services. Included are things such as non-school reading materials, haircuts, entertainment, and personal care items.

Child-Rearing Expenses

Child support and overall spending on children for that matter is an extremely sensitive topic in divorce and parent custodial matters. To begin understanding what is right or fair for child support we should start by looking at what costs typically arise when providing for a child. Listed below are some very common expenses.

Necessities Such as Food, Clothing, Shelter

  • groceries, snacks, beverages, and other food items
  • boots, shoes, jackets, and appropriate clothing
  • housing shelter costs, such as mortgage or rent, utilities, telephone, and water

Medical Care Insurance

  • medical, dental, and vision insurance

Uninsured Medical Expenses

  • out-of-pocket medical costs that exceed the cost of a basic health care insurance plan
    • including co-pays, deductibles
    • accident or emergency services costs
  • dental braces
  • eyeglasses
  • special health care costs

Educational Fees

  • school clothes/uniforms
  • school photos
  • yearbooks
  • tuition fees
  • textbooks
  • lunch money
  • private tutors, if necessary

Childcare

  • daycare services
  • babysitters
  • nannies
  • childcare during summer months, spring break, and some holidays

Transportation/Travel

  • basic transportation and travel cost
    • gas fees
    • car payments
    • registration
    • insurance
  • bus fare or other forms of transportation
  • child’s travel to visit the noncustodial parent

Entertainment

  • access to computers
  • television programs
  • games
  • Internet
  • movie theatre
  • amusement parks
  • camping trips and other outings

Extracurricular Activities

  • after-school programs/classes
  • summer camp
  • sports activities
  • clubs – ex. Girl Scouts or Boy Scouts
  • music, dance, or other private lessons

While this list is not exhaustive, it gives a good indication of what costs might come up over the course of your child’s life. When considering what is enough spending on children, it is important to know basic child support payments may not (and probably won’t) provide your child with more than their minimal needs. If you want them to enjoy an enriched life too, you may end up spending a bit more.

What Am I Paying For?

State laws, which vary from state to state, regulate what expenses are included in direct child support calculations. All 50 states create and utilize child support guidelines to determine amounts one parent may be required to pay to the other for child-related expenses. A variety of factors are taken into consideration to decide what is ultimately the amount of support needed to maintain a child’s standard of living as close to what it was in a two-parent home. Income and the ability to pay support are primary factors in these calculations.

Be sure and check the child support guidelines in your state, as the laws vary greatly.

Once the court factors the essential financial and support needs of a child, a child support order is issued to reflect the determined amount one parent must pay. Should there be a change in the child’s needs, or if a significant difference develops in one parent’s circumstances,, a request for change may be filed.

While childcare, uninsured medical expenses and extracurricular activities are typical expenses in raising a child, they are not always routinely calculated in child support amounts ordered by the courts. These costs may be included in the divorce settlement agreement, however, upon request.

To avoid questions and potential disagreements with your ex-wife in the future, lay out as many of these additional child-rearing expenses as possible in your divorce agreement. If you did not outline these other costs, daycare or uninsured dental care as an example, in your initial child support agreement, you might wish to do so now. 

Don’t underestimate the value an experienced divorce lawyer can provide to help ensure the best outcome for both you and your child.

While courts may not command the parent paying child support to provide additional monies to cover dance recitals and traveling sports, when it’s important to your kid, you might want to go ahead and budget a little extra for upcoming events.

As you evaluate the needs for your lifestyle as a single man and work to determine a budget for your post-divorce life, be realistic about what child support covers and what it does not. There may be times you are asked to pay for things that are not basic needs but will enhance your child’s life. Responding to these money inquiries may require setting aside personal feelings of your ex. This is why detailing what supporting your child after a divorce entails, as precisely as possible, in your initial divorce discussions should help you navigate when these times come.

My Ex Won’t Account for the Money

Courts do not require the parents who receive child support to prove the child support payments go toward specific expenses or activities. It is assumed by the courts that custodial parents of children are spending on children as required to adequately raise the child. Thus, they will not monitor the expenses and spending habits of a custodial parent unless there is compelling evidence to indicate misuse of support payments.

Continually being asked to send additional money or receiving numerous requests to purchase essential items like underwear, socks, and toothpaste may indicate your ex-spouse is not using the support funds correctly.

Before getting too pissed off, see if a change in circumstances is causing these requests. Maybe her car broke down, and she needs extra money for repairs. You can give her some slack, or help her out a little bit, or you can laugh in her face and tell her to ride the damn bus. But don’t shoot yourself in the foot. You never know when circumstances may be reversed, and you may be the one in a financial pinch.

However, if you are convinced your ex-wife is not utilizing the support payments to provide for your kids, start taking notes. Record the requests she makes for extras, as well as any spending you are doing during your parenting time if you end up purchasing necessities for your child. Keep receipts of what you buy and request reimbursement for amounts you think are reasonable.

If your reimbursement requests go ignored, or the pleas for more money from you do not stop, consider consulting an attorney.

Spending on Children, the Bottom Line

It is highly unlikely the amount set for child support by the courts will cover all the needs of your children all through their childhood years to age 18. The more you can prepare yourself (and any future spouse) for covering some additional expenses the better off your child, and all parental parties will be.

Discuss with your child’s mother early on how you will split extra costs for your kids to avoid potentially ugly discussions down the line. It is better to deal with the issues now than to disappoint your child later because you disagree with their mom on who will pay for piano lessons or hockey skates.

Spending on children is something every parent must do, whether married or divorced. While child support payment and money for extras is for the care and benefit of your child, you aren’t a bad dad if you draw the line at excessive spending.

 


(c) Can Stock Photo / nastia1983

How Divorced Dads Are Saving for College

How Divorced Dads Are Saving for College

If you’re a divorced dad who hasn’t started saving for college, you’re not alone. Most parents want their child to go to college, but less than 40% have a plan to pay for it. With less than 25% of funds currently spent on college coming from savings, it’s no wonder student loan debt is so high.

Annual college tuition and fees are now averaging nearly $35,000 at a private, four-year institution. They are almost $10,000 at a public four-year college and $3,500 at public two-year schools. As costs continue to increase the struggle to pay for them will too.

Results from the 10th annual study, How America Pays for College 2017, show parents are paying 31% of these costs through savings or loans, with students picking up 30%, family and friends covering 4%, and scholarships funding for the remaining 35% of advanced educations.

As a divorced dad, saving for college on top of child support payments, everyday living expenses, and your future retirement, may seem impossible. Yet, with a bit of planning and perhaps some creativity too, you can start saving today. Thus, making advanced education an affordable option for your children in the future.

It’s Not Too Late to Start Saving for College

Choosing to attend in-state versus out-of-state schools is one way students themselves can reduce the overall cost of college. Earning college credits in high school, or attending community colleges for one or two years before moving on to four-year institutions are others. Living at home instead of at college, or living with one or more roommates, help as well.

Applying for scholarships and working while in high school are additional ways your child can help. This will minimize the impact later on your wallet and theirs too.

Even if your son or daughter is now a sophomore in high school, it’s not too late to start saving for college. Any savings is beneficial but the sooner you start, the better of course. According to Finaid.org, stashing away just $50 per month from your child’s birth to the time they turn 17 would provide $20,000, assuming a 7% return on investment.

Before starting college savings, however, experts suggest:

  • Paying off any credit card debt or other high-interest loans.
  • Establishing an emergency savings account with 3-6 months of expenses accumulated 
  • Regularly contributing to your tax-advantaged retirement savings accounts – 401ks, Traditional IRAs, etc.

Additional College Saving Tips

Cut non-essential expenses to provide more money for savings. Track your spending to see if there are any expenses you can eliminate to increase your savings for college. Think cable TV, gym memberships, subscriptions you don’t use or eating out less. $5, $10, or $25 savings add up over time.

Increase your income. Ask for a raise at work or apply for a promotion. Seek a position at a competing company offering a larger salary and benefits. Turn an interest or a hobby into a side hustle and create an additional income stream or pick-up a part-time job.

Keep substantial savings in your name with your child as beneficiary, to avoid any loss of student aid. For every dollar above $3,000 saved in your child’s name, 20 cents is subtracted.

Make savings automatic. Make it easy on yourself by automatically depositing a portion of your paycheck into your savings.

Where to Stash Your Money

529 College Plans

More than 30 states offer a 529 college savings plan with full or partial tax savings benefits. Also known as Qualified Tuition Programs (QTP), 529’s are funded with after-tax money you’re allowed to withdraw later tax-free, including any gains, for use on qualified education costs, such as tuition, fees, and books. These state plans offer various investment options and expenses, and contribution limits vary. 

A 529 account owner is allowed to withdraw funds at any time for any reason – but the earnings portion of non-qualified withdrawals will incur income tax plus a 10% penalty tax. Should your child not end up going to college, you can typically transfer the account to another beneficiary.

Most plans allow you to change your 529 plan investment options twice per calendar year and allow for a rollover of funds into another 529 plan once per 12-month period.  529 programs have no income, age, or annual contribution limits, but may have lifetime contribution limits – $235,000 to $500,000 depending on the plan.

Roth IRA

Roth IRAs, popular as tax-advantaged retirement savings vehicles, can also be used for college savings. As with a 529 plan, you contribute after-tax money to a Roth IRA, and any investment gains can later be withdrawn tax-free, typically for retirement after age 59-1/2. But a Roth IRA also allows you to remove funds tax- and penalty-free, after five years, when used to pay for qualifying educational expenses. Should your child not attend college, you can use the funds for your retirement.

There are income and contribution limits with the Roth IRA. Single taxpayers earning more than $129,000 per year are not eligible, and contributions are limited to $5,500 per year ($6,500 for those over age 50).

Coverdell Education Savings Account

Coverdell ESA’s may be used to cover not just college costs but also any educational expenses, including private school tuition at K-12 institutions. Like a 529 college savings plan, the Coverdell ESA is typically tax-advantaged when utilizing the savings for education expenses.

You may contribute $2,000 per child per year, although contributions phase out for anyone earning more than $95,000 per year. 

Similar to the 529 and Roth IRA, money in a Coverdell ESA is considered your asset, not your child’s for financial aid purposes. Please note, however, funds not utilized before your child turns 30 may be subject to taxes and penalties.  

Prepaid College Tuition Plans

Prepaid plans allow you to pay for a portion of your child’s college tuition today, locking in current costs and in turn protecting you from future tuition hikes. Like 529 college plans, monetary gains in these programs are typically exempt from federal taxes. A dozen plus states offer prepaid tuition plans but this not the most recommended method of saving for college, as it severely limits educational choices to the state they are purchased.

UGMA / UTMA Custodial Accounts

The Uniform Gift to Minor’s Act (UGMA) and Uniform Transfer to Minor’s Act (UTMA) accounts are custodial accounts to hold and protect assets for minors until they reach adulthood. Because the assets are considered the property of the child, they provide some tax benefits, but less than a 529 plan would. Additionally, unlike other saving plans, they can be considered your child’s asset affecting federal aid amounts your child qualifies for.

A custodian can initiate withdrawals for the child’s benefit provided the expenses are for a legitimate need. Unlike other college savings accounts, payments are not limited to education costs. Once your child becomes a legal adult, they may use the money for any purpose without custodian consent.

Other Ways to Save for College

  • Sign up for Upromise – Register for a free at Upromise.com and earn cash back for college with your shopping, dining, and travel. You earn money by using your registered credit, debit, and loyalty cards at participating businesses. Accumulate savings in a savings account, a 529 plan, or have a check sent to you. 
  • Credit Card Rewards – Find a credit card specifically designed to earn college savings or use any cash back rewards card to amass savings for college. By using your credit card to pay for items such as your utilities, your cell phone bill, groceries, and insurance and paying off the balance in full each month, you’ll accrue some additional savings for college. Of course, utilize any credit card responsibly and don’t go into credit card debt trying to save. 
  • LEAF College Savings Gift Cards – Leaf provides family and friends a way to gift a monetary amount for your child’s education. A gift card is purchased via LeafSavings.com and sent to you via email, Facebook, or postal service. You then redeem the gift card on Leaf’s site and transfer it to your 529 college savings plan.

No matter how or where you decide to save for college, get started as soon as possible to take advantage of time and compounding interest. You and your child will be thankful you did. Remember, every little bit helps. 

Sources and Recommended Resources:

What is a 529 plan?

Choosing the Best 529 College Savings Plan

 


(c) Can Stock Photo / karenr